Indonesia New Sukuk Rallies on Supply Shortage: Islamic Finance
November 23, 2012
A shortage of Islamic sovereign debt saw Indonesia?s new dollar-denominated sukuk rally two times faster than non-Islamic securities this week after the sale attracted $5 billion in orders for $1 billion on offer.
The Southeast Asian nation sold the bonds maturing in 2022 at a coupon of 3.3 percent, its third issuance since 2009. The yield fell 17 basis points to 3.13 percent from Nov. 19, compared with an eight basis point decline to 2.91 percent on the 2022 notes that don?t comply with religious tenets. In the international market, Shariah-compliant borrowing costs are at a record-low 2.82 percent.
The shortage may become more acute next year as the government plans to cut overseas sales in 2013 to reduce its foreign-currency risk, Robert Pakpahan, acting director general at the debt management office, said in an interview yesterday. Indonesia was able to borrow at 70 basis points less than its previous sukuk sale in November 2011 after winning investment- grade rankings from Moody?s Investors Service and Fitch Ratings.
?Alternatives are very few given the scarcity of emerging- market sovereigns, therefore a well-known credit like Indonesia is warmly welcomed and heavily demanded,? Sergey Dergachev, a senior portfolio manager at Frankfurt-based Union Investment Privatfonds who purchased the debt, said in a Nov. 21 e-mail. ?There?s a huge chunk of demand from sukuk funds that are long- term investors.?
Overseas Borrowing
Buyers in the Middle East dominated interest among some 250 investors, according to a person familiar with the matter who declined to be named as the information hasn?t been made public. That region accounted for 30 percent of the order book, compared with 23 percent in Asia, 20 percent in Indonesia, 12 percent in the U.S. and 15 percent in Europe.
Around 17 percent of Indonesia?s $141 billion of debt outstanding has been sold globally, finance ministry data show. Issuance of international notes could be as low as 18 percent of total sales next year, compared with 20.6 percent in 2012, Pakpahan said in Jakarta, adding that the numbers will be finalized by the end of the year.
Indonesia needs to reduce its dependence on the global bond market given the proportion of debt sold overseas is typically in the single digits in higher-rated nations, Thomas Byrne, senior vice president for sovereign risk at Moody?s in Singapore, said at an investment summit in Jakarta on Nov. 6.
?Diversity Value?
Southeast Asia?s biggest economy is rated BBB- and Baa3, respectively, by Moody?s and Fitch, the lowest investment-grade and four levels below Malaysia. Expansion that?s held above 6 percent for the past eight quarters has made the nation the fastest growing in the region, while foreign-exchange reserves have more than doubled to $110 billion since the end of 2008.
?There?s still a lot of liquidity with sukuk buyers,? Abdul Kadir Hussain, chief executive officer of Mashreq Capital DIFC Ltd. in Dubai, said in an e-mail yesterday. ?There aren?t many sukuk from the Far East that are compliant with standards in the Gulf Cooperation Council and this one was, so there?s some diversity value.?
The yield on Indonesia?s 4 percent dollar-denominated Islamic bonds maturing in 2018 fell three basis points, or 0.03 percentage point, to 2.86 percent this week, one basis point off the record low reached in October, according to data compiled by Bloomberg. The rate on the 8.8 percent Shariah-compliant notes due in 2014 climbed four basis points to 2.06 percent.
?Attractive Yields?
The extra yield investors demand to hold the 2014 securities over Malaysia?s 3.928 percent debt due June 2015 widened six basis points this year to 48 basis points, data compiled by Bloomberg show. The difference between average borrowing costs on global sukuk and the London interbank offered rate, or Libor, narrowed 88 basis points to 185 basis points, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index.
Global issuance of bonds that comply with Islam?s ban on interest reached a record $43.4 billion in 2012, surpassing last year?s previous all-time high of $36.7 billion, data compiled by Bloomberg show.
The Bloomberg Malaysian Sukuk Ex-MYR Index of foreign- currency Islamic debt listed in Malaysia decreased 0.1 percent this week to 111.261 as of Nov. 22, trimming gains this year to 6.5 percent.
Indonesia last sold 913 billion rupiah ($94.7 million) of local-currency Shariah-compliant bonds on Oct. 30, exceeding its goal of 500 billion rupiah, a statement on the debt management office?s website shows. Investors bid for 5.3 times the amount offered, the biggest ratio since April 10.
Foreign investors boosted holdings of Indonesian debt by 17.8 percent this year to 262.5 trillion rupiah as of Nov. 19, Finance Ministry data show.???
?We bought the sukuk because there?s a supply shortage of Islamic bonds in Indonesia,? Akbar Syarief, a fund manager overseeing about 3.3 trillion rupiah at MNC Asset Management, said in a Nov. 21 interview from Jakarta. ?The country?s growth prospects are encouraging and the attractive yields also make the sukuk appealing.?
Bloomberg
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